My opinion is that salesforce.com, Inc. (NYSE: CRM) is the better buy as compared to its cloud computing stock peer Snowflake Inc. (SNOW). I previously wrote about CRM in an article published on January 20, 2022, and I have decided to upgrade Salesforce from a Hold to a Buy. My Hold investment rating for SNOW stays unchanged as per my prior December 16, 2021 update for the company.
Salesforce boasts better profitability as compared to Snowflake. Although CRM’s revenue growth rates are lower than that of SNOW, the former is expected to see stable top-line expansion in the near term in contrast to the latter which is witnessing a significant moderation in its sales expansion. In addition, Salesforce’s valuations are cheaper than that of Snowflake, and this validates my preference for the former.
SNOW And CRM Stock Key Metrics
In the past one month, there has been a significant divergence in the share price performance of SNOW and CRM as per the chart below. Salesforce’s shares rose by + 8.6% in the last one month, which outperformed the S&P 500’s + 2.7% increase during the same period. In contrast to the gains recorded by CRM and the S&P 500, Snowflake saw its stock price drop by -22.2% over this time period.
Salesforce’s And Snowflake’s Stock Price Performance In The Last One Month
The difference in the key forward-looking metrics that both companies disclosed as part of their respective recent quarterly results announcements explained why CRM outperformed SNOW.
Salesforce reported the company’s Q4 FY 2022 (YE January 31) financial results on March 1, 2022 which came in above the sell-side’s consensus forecasts. More significantly, CRM’s Q1 FY 2023 and full-year FY 2023 guidance also exceeded market expectations.
Salesforce had increased its revenue guidance for full-year fiscal 2023 from $ 31.75 billion (prior guidance) to $ 32.05 billion (midpoint of new guidance) at the beginning of this month, and this turned out to be roughly + 1% above the Wall Street’s consensus top-line estimate as per S&P Capital IQ. CRM also kept its FY 2023 non-GAAP operating profit or EBIT margin guidance unchanged at 20%, which translates into a +1.3 percentage points expansion as compared to its FY 2022 operating margin of 18.7%.
CRM also guided its quarterly revenue to grow by + 24% YoY to $ 7,375 million in Q1 FY 2023. This is better than Salesforce’s + 22.6% YoY top-line expansion a year ago in Q1 FY 2022 and the market consensus’ prior expectations of a relatively lower + 22% revenue growth (as per S&P Capital IQ) for CRM in the first quarter of the new fiscal year.
There were worries earlier that Salesforce’s near-term revenue growth will moderate substantially and disappoint the market as a result of demand being pulled forward due to the pandemic. Investors also feared that the company’s future margins will be diluted by the integration of recent M&A targets. CRM’s above-expectations forward-looking financial metrics have helped to put such concerns to rest.
In contrast, Snowflake’s management guidance disappointed the market, even though its Q4 FY 2022 (YE January 31) financial performance revealed on March 2, 2022 was better than what the market had expected.
SNOW’s forward-looking guidance disclosed as part of its Q4 FY 2022 financial results points to the company expanding its top line by + 79-81% and + 65-67% for Q1 FY 2023 and FY 2023, respectively. In contrast, Snowflake’s YoY revenue growth was much higher at + 101.5% and + 110.4% for Q4 FY 2022 and Q1 FY 2022, respectively. Similarly, SNOW did much better in the prior fiscal years, increasing its revenue by + 106.0% in FY 2022 and + 123.6% in FY 2021.
At its Q4 FY 2022 earnings call, Snowflake explained that it “assumed an approximately $ 97 million (negative) revenue impact” attributable to “platform improvements within our cloud deployment.” On the positive side of things, CRM expects that this will “lead customers to deploy more workloads to Snowflake due to the improved economics.” On the negative side of things, SNOW acknowledged that the company’s net dollar revenue retention rate will decline from 178% in Q4 FY 2022 to above 150% in FY 2023. Snowflake highlighted in its quarterly financial filings that net dollar revenue retention rate is an indicator of “the growth in use of our platform by our existing customers” which is in turn “an important measure of the health of our business and our future growth prospects.”
In this section, I have largely focused on the two cloud computing companies’ revenue growth outlook. I do a comparison of the two companies’ profitability in the subsequent section.
Is Snowflake More Profitable Than Salesforce?
Snowflake is less (rather than more) profitable than Salesforce, although the former is expected to witness a significant improvement in its profitability going forward.
A Comparison Of Salesforce With Snowflake On Various Metrics
|Stock||Consensus Forward One-Year Enterprise Value-to-Revenue Multiple||Consensus Forward Two-Year Enterprise Value-to-Revenue Multiple||Consensus Forward One-Year EV / EBITDA Multiple||Consensus Forward Two-Year EV / EBITDA Multiple||Consensus Forward One-Year EBIT Margin||Consensus Forward Two-Year EBIT Margin||Consensus Forward One-Year Revenue Growth Rate||Consensus Forward Two-Year Revenue Growth Rate|
|Salesforce||6.5||5.4||26.0||21.7||20.0%||20.9%||+ 21.2%||+ 17.9%|
|Snowflake||32.3||20.7||1,244.2||331.3||1.2%||3.7%||+ 65.8%||+ 55.3%|
Source: S&P Capital IQ
The sell-side analysts expect Snowflake to turn profitable at the EBIT level in fiscal 2023, and SNOW’s EBIT margin is forecast to improve from 1.2% in FY 2023 to 3.7% and 8.2% for FY 2024 and FY 2025, respectively. Snowflake also guided at the company’s recent quarterly results briefing that it will be “turning to profitability for the full fiscal year 2023” and attributed its improvement in margins to “growing scale.”
But Salesforce is much more profitable than Snowflake as evidenced by its superior EBIT margins highlighted in the peer comparison table above. Although Snowflake boasts faster revenue growth rates on an absolute basis, Salesforce has shown that it is able to sustain its current level of top-line expansion in the near term. As mentioned in the preceding section, SNOW sees its revenue growth slowing from + 110.4% YoY in the first quarter of fiscal 2022 to + 79-81% YoY in Q1 FY 2023, while CRM expects its YoY top-line expansion to improve from + 22.6% in Q1 FY 2022 to + 24% in Q1 FY 2023.
More importantly, Salesforce’s forward Enterprise Value-to-Revenue and EV / EBITDA multiples are attractive on both an absolute and relative (compared to SNOW) basis. CRM’s mid-single-digit forward Enterprise Value-to-Revenue multiple is appealing considering its forecasted EBIT margins in the 20s percentage level and its estimated revenue growth rates in the high teens to low-twenties percentage range.
How Are Snowflake And Salesforce Different?
A January 6, 2022 sell-side research report (not publicly available) titled “2022 Software Playbook” published by Jefferies (JEF) organized listed software stocks by various sub-sectors.
In the Jefferies report, Salesforce was placed in the “front office” category of companies alongside peers like Adobe (ADBE) and HubSpot (HUBS). On the other hand, the sell-side research firm included Snowflake in the “infrastructure” sub-sector which also had other listed names like Datadog (DDOG) and Splunk (SPLK). In other words, CRM offers cloud computing services to help companies maintain their relationship with their customers or clients, while SNOW provides part of the infrastructure (specifically a cloud data platform which it refers to as the “Data Cloud”) needed to support the corporates. ‘business operations.
Notwithstanding this difference, both Salesforce and Snowflake have excellent long-term growth prospects as I would highlight in the next section.
Are Both SNOW And CRM Stock A Good Long-Term Investment?
SNOW and CRM are both good long-term investments, if one assesses the future growth runways for these two companies from a quantitative perspective.
At the company’s Investor Day in September 2021, Salesforce mentioned that it expects to generate $ 50 billion of revenue by fiscal 2026, which translates into a decent + 22.7% CAGR revenue for this year. This $ 50 billion seems reasonable, considering that it is only a fifth of the company’s estimated 2025 Total Addressable Market of $ 248 billion, and is also below the Wall Street’s consensus top-line forecast of $ 51.2 billion (source: S&P Capital IQ).
In the case of Snowflake, the company sees itself achieving $ 10 billion in product revenue by fiscal 2029 as per its June 2021 Investor Day. This implies that SNOW’s forward seven-year revenue CAGR is estimated to be + 36.4%. Snowflake’s FY 2029 product revenue target is set based on the assumption that it will boast 1,400 million-dollar revenue customers (implying a + 33.6% CAGR) in seven years’ time which is supported by the company’s rapid growth in the list of its customers boasting trailing sales exceeding $ 1 million. As a reference, SNOW’s million-dollar revenue customers grew by + 139% YoY and + 24% QoQ to 184 as of end-FY 2022.
In the final section of the article, I highlight my preferred pick of the two.
Is SNOW Or CRM Stock A Better Buy?
CRM stock is a better buy than SNOW, as Salesforce’s valuations are relatively more attractive. Furthermore, CRM boasts superior profitability and it is not experiencing a substantial slowdown in its revenue growth like Snowflake.